Emerging markets undervalued, says DeAWM CIO

Developed markets have sharply rebounded following the global financial crisis, thanks to a US economic revival that has repeatedly sent its stock market to all-time highs and shunted emerging markets back into the shade.

However, Deutsche Asset & Wealth Management (DeAWM), the fund manager with 934 billion euros (US$1.3 trillion) in AUM, expects a turning point to arrive that will see emerging markets stage a comeback from a long-term perspective.

DeAWM’s chief investment officer, Asoka Woehrmann, told Asia Asset Management in London during the firm’s two-day press event that emerging markets have outperformed developed markets at times this year.

“That’s showing that the end of outperformance of the developed markets is coming. Now we look at the emerging markets; can they outperform or equally perform?”

Mr. Woehrmann highlighted a number of key developed markets that have lacked growth momentum. He suggested the economies of the US, UK and eurozone have entered the “turtle cycle”, which is characterised by slow growth and low inflation. “We are very confident we have not reached the mid-cycle, and I expect slower but longer [recovery], and you know that turtles are slow animals, but long-lived,” he claimed.

Mr. Woehrmann added that the resurgence in developed markets has been relatively slow compared to past recoveries following financial crises. He said this is a result of the deleveraging process after the bursting of the US housing bubble. “American GDP depends 70% on American consumers, but they can’t consume anymore. They have to save; the saving rate in the US ranges from minus to 5% plus. What a remarkable change; this is the world we face,” he said.

Despite their sluggish growth, Mr. Woehrmann said he believed the eurozone economies were in much better shape compared to two years ago, when the bloc was battered by the debt contagion crisis.

He claimed that emerging markets were currently undervalued. “It’s cheap, especially against developed markets. I’ve said that equity markets in the rest of the world are not expensive, but also not anymore cheap. And think about the European equity story; that has been very cheap two years ago, and that is now fairly valued.”

Mr. Woehrmann said he expected emerging markets could beat their counterparts in the long-run, provided the US Federal Reserve’s forward guidance of monetary policy is carefully communicated. The announcement that the Fed would begin curtailing its unprecedented quantitative easing programme in the middle of last year led to significant outflows from emerging markets. “The world is connected; global markets have become one big market. It is not only the exit of US strategy; it is impacting the world, because lots of easy money went to the emerging markets, especially bond markets,” he said. He expects the Fed to raise rates by mid next year as part of a gradual tightening cycle.

Amid a low-yield investment environment, Mr. Woehrmann said that he was bullish on Asian credits. “The inter-region trade becomes important and China is deepening its economy and going to turn its long-term business model, [from a] pure exporting country to a more domestic consumer-driven economy. This is a huge implication for the world and especially for credit in Asia.”